Mumbai: The board of the capital market regulator is set to discuss a proposal to revamp the fee structure for the mutual fund industry, which manages assets in excess of ₹80 lakh crore.
The move is aimed at making mutual funds more transparent and cost-efficient for investors as part of a comprehensive review of Securities and Exchange Board of India (Sebi) regulations in nearly three decades. The regulator's board, which is scheduled to meet on December 17, will also discuss a proposal to simplify initial public offering (IPO) disclosures and ease pre-IPO lock-in rules besides taking up the expert panel's report on conflict of interest rules for its top officials.
In October, Sebi proposed to reduce total expense ratio (TER) across equity and debt funds. It also proposed lower brokerage fees.
TER has been defined by Sebi to cover all scheme expenses charged to investors. It's the fee deducted from assets under management to cover management and operating expenses. TER charged in slabs based on the size of the asset under management. The regulator has suggested reducing the TER mutual funds charge by 15-20 basis points in a discussion paper.
Another key proposal is lowering the brokerage paid for cash market transactions to two basis points (bps) from 12 basis points, and five basis points to one basis point for derivative transactions. This is being resisted by market intermediaries, said people familiar with the development.
Sebi said high brokerage charges could be attributed to services other than execution, which may include research. As research is inherent to investment management and advisory, a separate limit for this may not be appropriate.
"Due to such bundled service arrangements, the investors may often end up paying twice for the research," Sebi had said in its discussion paper.
Fund houses and brokers differ
"The proposed reduction in brokerage may not be in the interest of investors in the long term," said Anand Rathi, chairman of Anand Rathi Group. "Performance of any mutual fund is dependent on the quality of sell-side research provided by brokers. Buy-side research of mutual funds doesn't (engage in) detailed research but mainly evaluates sell-side research to make investment decisions, hence there is no duplication of research."
Sebi has already set a limit of 12 basis points for the cash market and five basis points for derivatives, he said.
"In actual practice, every mutual fund decides the actual rate based on their assessment of quality of research and trading efficiency provided by the broker and varies between six bps to 12 bps," Rathi said. "Hence, it is better to leave to the mutual fund manager to decide actual brokerage and not change the present limits."
The watchdog has received a number of responses from market participants on the mutual fund regulations proposal.
"The Sebi board will take a final call," said one of the persons cited above.
The regulator has also proposed keeping all statutory levies, including securities transaction tax (STT), goods and services tax (GST) and stamp duty, outside TER limits. Further, it plans to scrap the additional five basis points that fund houses were allowed to charge across schemes. According to a note by global brokerage firm Jefferies, the removal of the five basis point allowance, previously granted to offset exit-load credits, would directly hurt the margins of asset management companies.
Initial share sales
The board is also likely to discuss the proposal to introduce a separate offer document summary containing concise information about the issuer company, along with streamlining the process for pre-IPO pledged shares.
The offer document typically comprises detailed disclosures across various sections such as industry overview, business, financials, pending litigation, management discussion, offer procedure and articles of association.
The regulator is of the view that, due to size and complexity, key disclosures relating to the public issue-such as major risk factors and financial highlights-are too widely dispersed across multiple sections. The summary would be made available separately from the offer document and improve information accessibility for retail investors. The current requirement to prepare an abridged prospectus would be dispensed with.
